DeFi Demand: DeFi borrowing is inefficient. Its risk management relies on overcollateralization, an unconventional concept in traditional credit markets. When asset prices rise, investor demand grows to borrow against those gains. Interest rates increase to attract lenders. Rates are definitively driven by demand and lenders follow. That’s why DeFi rates collapsed last year as risks rose – nobody wanted to borrow. But digital runs hot; demand can return quickly. And judging by DeFi rates, demand is picking up. Deposit rates for USDC on Aave, the largest stablecoin pool on-chain, have nearly doubled in the last month. The second largest USDC pool on Compound has seen similar rate increases – only with a twist. In addition to demand driving deposit rates higher, the cost to borrow USDC fell sharply. Borrowers are granted newly issued COMP tokens paid as an extra incentive, and COMP rose sharply in hopes of increased DeFi volumes. It is a second hint of rising demand. The pseudo-arbitrage of “yield farming" – borrowing and lending in the same protocol to earn a positive spread paid in native tokens – rose to more than 100 basis points annualized. Opportunities like this were a hallmark of the 2021-2022 bull market. Seeing one emerge in a large stablecoin pool is interesting. But in the end, the Fed is the ultimate credit regulator. On-chain depositors are competing with a 4.73% yield on 3-month Treasury bills. An inflow of deposits from traditional finance is unlikely. At least, not yet.